Skype Is Said to Have Demanded More Than $7 Billion in Talks

A deal would value Skype at about $8.5 billion and may be announced as early as today, said one of the people, who asked not to be identified because the talks are private. Photographer: Denis Doyle/Bloomberg

May 11 (Bloomberg) -- Skype Technologies SA’s owners
refused to entertain offers of less than $7 billion, the value
they expected the startup to get from a planned initial public
offering, before agreeing to a buyout from Microsoft Corp.,
according to people with knowledge of the talks.

Microsoft Chief Executive Officer Steve Ballmer clinched
the $8.5 billion all-cash agreement May 9, just more than a
month after his initial overture to private equity firm Silver
Lake, one of Skype’s biggest owners, said the people, who asked
not to be identified because the talks were private.

“Microsoft really wanted this,” said Matt McCormick, a
money manager for Cincinnati-based Bahl & Gaynor Inc., which
oversees $3.6 billion, including Microsoft shares. “Microsoft
right now is trying to do things to keep up with other faster-growing technology companies.”

Ballmer, 55, is making Microsoft’s largest acquisition on a
wager he can use Internet calling to play catch-up in mobile and
Web advertising. He offered more than $7 billion to cover
Skype’s debt and keep a rival from gaining a business that would
add calling features to games, e-mail and software on computers
and handsets. While Google Inc. expressed interest, neither it
nor other bidders made formal offers, the people said.

Microsoft, based in Redmond, Washington, is making the
biggest Internet takeover in more than a decade, part of an
effort to lure Web users and advertisers and help it catch
Google in online advertising and Apple Inc. in mobile software.

“This could give Microsoft a much-needed kick-start” in
telecommunications, said Paolo Pescatore, an analyst at CCS
Insight in London. In voice services, “Skype has certainly set
the benchmark and gained a lot of traction.”

Microsoft was already negotiating a partnership with Skype
when Ballmer kicked off takeover discussions. He said in an
interview that he opted to pursue an acquisition after
consulting with the leaders of the Office and Windows divisions.

Ballmer said he then directed Chief Financial Officer Peter
Klein to make an unsolicited takeover offer to Silver Lake.
Talks began in late March, the people familiar said.

Ballmer led Microsoft’s efforts and kept the plans secret
outside of a small team, which included Microsoft Business
Division Chief Financial Officer Amy Hood and Marc Brown, who
oversees corporate development, one of the people said.

No-Shop Clause

Microsoft’s negotiators insisted on a no-shop clause, which
barred Skype from seeking other bidders, according to one person
familiar with the matter.

The parties agreed on a price in mid-April and signed the
deal the night before it was announced. Microsoft paid a high
premium in part because it expected the stock to rise after the
IPO, meaning it would cost more to acquire Skype down the road,
two of the people said.

“Microsoft was the only serious bidder at that number,’’
Marc Andreessen, co-founder of Skype investor Andreessen
Horowitz, a venture capital firm, said in an interview.

Skype’s backers also talked with Google but didn’t get to
discussing a price, and no formal offer was made, two people
said. There were no other serious offers, one of them said.

The deal will add to Microsoft’s profit in the year after
it closes, Ballmer said in an interview yesterday.

Microsoft slipped 16 cents to $25.67 yesterday in Nasdaq
Stock Market trading. That left it down 8 percent this year.

‘Deadly D’

Microsoft also may get a tax benefit from the deal. Klein
said the company will pay for the purchase using cash held
overseas, freeing it from having to pay taxes associated with
bringing cash into the U.S.

The company may use a technique known as the “Deadly D,”
named for a section of tax law, that can help reduce taxes in
cases where a U.S.-based company makes a foreign acquisition,
said Robert Willens, who owns a tax consulting firm in New York.

“As far as the tax implications, this is a sweetheart
deal,” Willens said. “This will be seen as a real important
aspect of deal and will make Microsoft investors more
comfortable with the transaction.”

Skype CEO Tony Bates will be president of the Microsoft
Skype Division, reporting to Ballmer. The agreement was approved
by the boards of both companies. Microsoft expects to receive
regulatory clearance for the purchase this year.

Skype was founded in 2003 by Niklas Zennstrom and Janus
Friis. The founders sold the company for $2.6 billion in 2005 to
San Jose, California-based EBay Inc., which in turn sold off
most of its stake four years later. Current investors include
EBay, Silver Lake and Andreessen Horowitz.

IPO Plans

A purchase by Microsoft would divert unprofitable Skype
from a plan, announced in August, to sell $100 million of shares
in an IPO. The company has struggled to convert users of its
free PC-to-PC phone services into paying customers, according to
a March regulatory filing. The company has 663 million total
users, most of whom aren’t active callers.

The purchase of Skype surpasses Microsoft’s acquisition of
AQuantive Inc. for about $6 billion in 2007. It’s also the
biggest takeover of an Internet company since the dot-com bubble
11 years ago, data compiled by Bloomberg show. Microsoft
abandoned an unsolicited effort to buy Yahoo! Inc. for as much
as $47.5 billion in 2008 and instead struck an agreement to
provide search services on Yahoo’s pages.

Microsoft offers corporate telephone services through its
Lync product, as well as consumer video-chat products as part of
its instant-messaging software and Xbox online service.

Skype as Verb

Tightly integrated Skype services could be an added selling
point for Windows Phone, the mobile operating system Microsoft
is promoting as to vie with Google’s Android and Apple’s iOS,
said Colin Gillis, an analyst at BGC Partners LP in New York.